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China takes new road to subsidy-free offshore wind

IN DEPTH | The sudden withdrawal of feed-in tariffs will force Chinese developers to cut costs fast as the state aims to halt all support by 2022, writes Yuki Yu

The Chinese offshore wind sector received a shock to the system in late May, when the National Energy Administration (NEA) suddenly announced it would end its generous feed-in tariff (FIT) scheme and replace it with auctions held by provincial governments.

One of the rules for the new tenders is that bids must be below the old FIT rate of 850 yuan ($133) per MWh — potentially rendering many projects in the 36GW pipeline unprofitable and forcing developers to significantly cut costs.

Chinese offshore projects have a current levelised cost of energy (LCOE) of $104-120/MWh, according to Bloomberg New Energy Finance (BNEF), so even with the existing FIT premium, Chinese developers are only making small profits on what are big, expensive, high-risk developments.

The Chinese government is hoping that its move will substantially reduce costs and bring the offshore sector to grid parity — a policy target set by the NEA last year. Offshore wind projects are expected to be subsidy-free in 2022 — only two years after onshore wind and PV are due to reach such milestones in China. Zero-subsidy bids have already won at offshore tenders in Germany and the Netherlands.

Beijing says it was forced to act to reduce the growing deficit in its Renewable Energy Development Fund (REDF), which pays for China’s green-energy subsidies. The deficit has reached 120bn yuan and was set to double in the next two years, according to an NEA official in the energy pricing division.

This is partly due to the unexpected boom in renewables, and partly because funding for the REDF comes from retail sales of electricity, which have been lowered by the government in recent years.

Offshore wind got off relatively lightly compared to the PV sector, which not only had its FIT taken away, but has also had all project approvals halted “until further notice”.

“Among all renewables, offshore wind currently has the highest subsidies. Therefore, it is a must for the offshore industry to embrace auction and price competition,” the NEA official tells Recharge.

Encouraged by the FITs — which were far higher than the $40-75/MWh seen recently in Europe — the Chinese offshore wind market boomed during 2017, with 1.16GW installed — a 97% year-on-year growth that increased the cumulative offshore capacity to 2.79GW.

'China now a driver of European energy transition': IEEFA

The sector had been due to continue its meteoric rise. Of the ten coastal provinces and provincial-level cities planning for new offshore projects, some had set hugely ambitious — though arguably unrealistic — installation targets for 2020, including Guangdong (12GW), Fujian (12GW) and Jiangsu (16GW). Guangdong, which only has 18MW currently installed, wants to build 30GW by 2030, and has selected 23 offshore wind zones that could ultimately host 66.85GW of turbines.

Many in the industry had been warning that the market was getting overheated.

“[The NEA] wants to see the industry grow in a stable and healthy way, instead of developing at a frenetic pace,” says BNEF analyst Zhou Yuyi.

Of the 36GW in the pipeline off China’s 14,500km coastline, 26GW will now have to bid in tenders. The remaining 10GW or so will be allowed to keep their promised FITs, including projects that are under construction (2GW), those that have secured financing and will soon begin construction (5GW) and those that have already received their final permits from local governments (about 2.8GW).

“The 10GW of projects provides a long-enough buffer for the industry before it heads to the new era of auction and price competition,” Zhou tells Recharge.

BNEF believes that 8.6GW will be installed offshore by the end of 2020. The government’s 13th Five-Year Plan (FYP), set in late 2015, called for 5GW of offshore wind by 2020, and Recharge understands that the FYP is now being modified accordingly.

How will costs be cut?

Developers will need to cut their LCOE to win at tenders while ensuring profitability.

Goldwind heralds distributed 'golden age' as profits leap

To hit the NEA target of $80/MWh in high-wind-speed regions such as Fujian and Guangdong, developers will need to reduce engineering, procurement and construction (EPC) costs by 16% and increase output by 13%, says Tian Qingjun, vice-president of turbine maker Envision.

In lower-wind-speed regions such as Jiangsu and Shangdong, EPC costs will need to be cut by around 33% from the current levels, he adds.

Lessons can be learnt from Europe, where offshore prices have more than halved to $40-75/MWh in recent years — largely through the use of bigger turbines and bigger wind turbine installation vessels (WTIVs). In simple terms, larger turbines generate more electricity than smaller ones, and larger vessels are able to speed up installation, reducing per-MW costs by being able to carry more turbine parts at one time and spending more time at sea than smaller installation vessels and barges.

Larger purpose-built WTIVs are also able to operate in deeper waters further from shore, where wind speeds are usually higher, thus further increasing the annual electricity production.

Of course, building wind farms further from shore will increase upfront costs. However, “the production increase would help to even out the cost”, stresses Zhou.

Deploying bigger turbines in deeper waters off China will require a slew of new WTIVs. The Chinese sector has largely depended on heavy-lift barges to install the turbines, which need to be slowly dragged around by tugs — a practice that would seem positively archaic in Europe.

But several local specialist installers are racing to build their own WTIVs, including Longyuan Zhenhua, Huadian Heavy Industry, China Communication Construction, Third Harbor Engineering and MBEC Fuchuan Heavy Industry. Chinese turbine maker CSIC Haizhuang, backed by mother company China Shipbuilding Industry Corp, is also looking to develop a business unit for building WTIVs.

China RPS won't include subsidy cuts for existing projects

It is estimated that 20 WTIVs will be designed or built from 2015-20,

leaving little room for overseas players. However, European players that offer equipment and technology know-how absent in the Chinese value chain still face a promising market, such as the Netherlands’ Royal IHC, which has seen Chinese sales of its “hydrohammer” pile driver climb in recent years.

The Chinese offshore sector also needs to increase the size of its turbines.

More than 55% of the 2.79GW installed off China consists of 4MW machines, with most of the rest in the 3MW range — a far cry from the 8MW-plus machines now being erected off Europe.

However, in China, where local OEMs dominate the market, progress is being made.

Goldwind currently has the largest offshore turbine commercially available, a 6.7MW model, and has built an 8MW prototype, which is due to be launched into the market this year.

Shanghai Electric, which has an exclusive licence to build Siemens Gamesa machines locally, is now selling 7MW and 8MW models, and ten units of the 7MW have already been ordered for the 264MW Pinghai Bay project being developed off Fujian by Sanchuan, a joint venture between China Three Gorges (CTG) and the provincial government.

There are now seven Chinese OEMs (not including Shanghai Electric) that are selling 5MW-plus models (see panel below).

Of the three other foreign offshore turbine makers — MHI Vestas, Senvion and GE — only the latter has made any in-roads in Chinese offshore. GE scored its first offshore turbine order in China in March 2017 for three of its 6MW Haliade models at CTG’s Xinghua Bay project off Fujian, making the OEM the first to supply machines to the US, European and Asian offshore markets.

However, this might not be the breakthrough the American company is hoping for.

China adds 7.9GW of wind in first half: NEA

The 77.4MW wind farm will host 14 different turbine models from eight suppliers, including Goldwind, Shanghai Electric, Taiyuan Heavy Industries, CSIC Haizhuang, Dongfang, Ming Yang and XEMC. Essentially, it is a demonstration project created to compare the latest 5MW-plus models to help CTG decide which machines to use for its massive 10GW offshore pipeline.

Of course, there are other ways that Chinese projects could improve their LCOE, such as using innovative foundation designs and producing key equipment locally, including subsea cables and converter stations.

Local cable manufacturers such as Jiangsu Zhogntian (ZTT), Jiangsu Hengtong and Ningbo Dongfang, are expected to grow in the coming years, with ZTT already winning an order to supply subsea cables to connect EnBW’s 497MW Hohe See project off Germany.

Chinese grid companies are among the most active globally in deploying cutting-edge VSC-HVDC (voltage source converters for high-voltage direct-current) technology for offshore power lines, which increases the efficiency and therefore lowers the cost of long-distance transmission.

China has built the world’s only multi-terminal VSC-HVDC grid that connects three onshore wind farms on Nan’ao Island in Guangdong to the mainland, and is building some of the world’s largest HVDC grids, such as the 1.6GW 800kV network connecting Yunnan, Guangxi and Guangdong provinces.

Cai is confident that in the coming years the Chinese will be able to reduce costs in much the same way as Europe has done as the market matures, experience grows and indigenous technology is deployed.

“As an industry we should support the zero-subsidy policy, which will push the Chinese sector to become a truly mature industry and spur technology innovation,” he says.

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China takes new road to subsidy-free offshore wind

China takes new road to subsidy-free offshore wind

IN DEPTH | The sudden withdrawal of feed-in tariffs will force Chinese developers to cut costs fast as the state aims to halt all support by 2022, writes Yuki Yu

The Chinese offshore wind sector received a shock to the system in late May, when the National Energy Administration (NEA) suddenly announced it would end its generous feed-in tariff (FIT) scheme and replace it with auctions held by provincial governments.

One of the rules for the new tenders is that bids must be below the old FIT rate of 850 yuan ($133) per MWh — potentially rendering many projects in the 36GW pipeline unprofitable and forcing developers to significantly cut costs.

Chinese offshore projects have a current levelised cost of energy (LCOE) of $104-120/MWh, according to Bloomberg New Energy Finance (BNEF), so even with the existing FIT premium, Chinese developers are only making small profits on what are big, expensive, high-risk developments.

The Chinese government is hoping that its move will substantially reduce costs and bring the offshore sector to grid parity — a policy target set by the NEA last year. Offshore wind projects are expected to be subsidy-free in 2022 — only two years after onshore wind and PV are due to reach such milestones in China. Zero-subsidy bids have already won at offshore tenders in Germany and the Netherlands.

Beijing says it was forced to act to reduce the growing deficit in its Renewable Energy Development Fund (REDF), which pays for China’s green-energy subsidies. The deficit has reached 120bn yuan and was set to double in the next two years, according to an NEA official in the energy pricing division.

This is partly due to the unexpected boom in renewables, and partly because funding for the REDF comes from retail sales of electricity, which have been lowered by the government in recent years.

Offshore wind got off relatively lightly compared to the PV sector, which not only had its FIT taken away, but has also had all project approvals halted “until further notice”.

“Among all renewables, offshore wind currently has the highest subsidies. Therefore, it is a must for the offshore industry to embrace auction and price competition,” the NEA official tells Recharge.

Encouraged by the FITs — which were far higher than the $40-75/MWh seen recently in Europe — the Chinese offshore wind market boomed during 2017, with 1.16GW installed — a 97% year-on-year growth that increased the cumulative offshore capacity to 2.79GW.

'China now a driver of European energy transition': IEEFA

The sector had been due to continue its meteoric rise. Of the ten coastal provinces and provincial-level cities planning for new offshore projects, some had set hugely ambitious — though arguably unrealistic — installation targets for 2020, including Guangdong (12GW), Fujian (12GW) and Jiangsu (16GW). Guangdong, which only has 18MW currently installed, wants to build 30GW by 2030, and has selected 23 offshore wind zones that could ultimately host 66.85GW of turbines.

Many in the industry had been warning that the market was getting overheated.

“[The NEA] wants to see the industry grow in a stable and healthy way, instead of developing at a frenetic pace,” says BNEF analyst Zhou Yuyi.

Of the 36GW in the pipeline off China’s 14,500km coastline, 26GW will now have to bid in tenders. The remaining 10GW or so will be allowed to keep their promised FITs, including projects that are under construction (2GW), those that have secured financing and will soon begin construction (5GW) and those that have already received their final permits from local governments (about 2.8GW).

“The 10GW of projects provides a long-enough buffer for the industry before it heads to the new era of auction and price competition,” Zhou tells Recharge.

BNEF believes that 8.6GW will be installed offshore by the end of 2020. The government’s 13th Five-Year Plan (FYP), set in late 2015, called for 5GW of offshore wind by 2020, and Recharge understands that the FYP is now being modified accordingly.

How will costs be cut?

Developers will need to cut their LCOE to win at tenders while ensuring profitability.

Goldwind heralds distributed 'golden age' as profits leap

To hit the NEA target of $80/MWh in high-wind-speed regions such as Fujian and Guangdong, developers will need to reduce engineering, procurement and construction (EPC) costs by 16% and increase output by 13%, says Tian Qingjun, vice-president of turbine maker Envision.

In lower-wind-speed regions such as Jiangsu and Shangdong, EPC costs will need to be cut by around 33% from the current levels, he adds.

Lessons can be learnt from Europe, where offshore prices have more than halved to $40-75/MWh in recent years — largely through the use of bigger turbines and bigger wind turbine installation vessels (WTIVs). In simple terms, larger turbines generate more electricity than smaller ones, and larger vessels are able to speed up installation, reducing per-MW costs by being able to carry more turbine parts at one time and spending more time at sea than smaller installation vessels and barges.

Larger purpose-built WTIVs are also able to operate in deeper waters further from shore, where wind speeds are usually higher, thus further increasing the annual electricity production.

Of course, building wind farms further from shore will increase upfront costs. However, “the production increase would help to even out the cost”, stresses Zhou.

Deploying bigger turbines in deeper waters off China will require a slew of new WTIVs. The Chinese sector has largely depended on heavy-lift barges to install the turbines, which need to be slowly dragged around by tugs — a practice that would seem positively archaic in Europe.

But several local specialist installers are racing to build their own WTIVs, including Longyuan Zhenhua, Huadian Heavy Industry, China Communication Construction, Third Harbor Engineering and MBEC Fuchuan Heavy Industry. Chinese turbine maker CSIC Haizhuang, backed by mother company China Shipbuilding Industry Corp, is also looking to develop a business unit for building WTIVs.

China RPS won't include subsidy cuts for existing projects

It is estimated that 20 WTIVs will be designed or built from 2015-20,

leaving little room for overseas players. However, European players that offer equipment and technology know-how absent in the Chinese value chain still face a promising market, such as the Netherlands’ Royal IHC, which has seen Chinese sales of its “hydrohammer” pile driver climb in recent years.

The Chinese offshore sector also needs to increase the size of its turbines.

More than 55% of the 2.79GW installed off China consists of 4MW machines, with most of the rest in the 3MW range — a far cry from the 8MW-plus machines now being erected off Europe.

However, in China, where local OEMs dominate the market, progress is being made.

Goldwind currently has the largest offshore turbine commercially available, a 6.7MW model, and has built an 8MW prototype, which is due to be launched into the market this year.

Shanghai Electric, which has an exclusive licence to build Siemens Gamesa machines locally, is now selling 7MW and 8MW models, and ten units of the 7MW have already been ordered for the 264MW Pinghai Bay project being developed off Fujian by Sanchuan, a joint venture between China Three Gorges (CTG) and the provincial government.

There are now seven Chinese OEMs (not including Shanghai Electric) that are selling 5MW-plus models (see panel below).

Of the three other foreign offshore turbine makers — MHI Vestas, Senvion and GE — only the latter has made any in-roads in Chinese offshore. GE scored its first offshore turbine order in China in March 2017 for three of its 6MW Haliade models at CTG’s Xinghua Bay project off Fujian, making the OEM the first to supply machines to the US, European and Asian offshore markets.

However, this might not be the breakthrough the American company is hoping for.

China adds 7.9GW of wind in first half: NEA

The 77.4MW wind farm will host 14 different turbine models from eight suppliers, including Goldwind, Shanghai Electric, Taiyuan Heavy Industries, CSIC Haizhuang, Dongfang, Ming Yang and XEMC. Essentially, it is a demonstration project created to compare the latest 5MW-plus models to help CTG decide which machines to use for its massive 10GW offshore pipeline.

Of course, there are other ways that Chinese projects could improve their LCOE, such as using innovative foundation designs and producing key equipment locally, including subsea cables and converter stations.

Local cable manufacturers such as Jiangsu Zhogntian (ZTT), Jiangsu Hengtong and Ningbo Dongfang, are expected to grow in the coming years, with ZTT already winning an order to supply subsea cables to connect EnBW’s 497MW Hohe See project off Germany.

Chinese grid companies are among the most active globally in deploying cutting-edge VSC-HVDC (voltage source converters for high-voltage direct-current) technology for offshore power lines, which increases the efficiency and therefore lowers the cost of long-distance transmission.

China has built the world’s only multi-terminal VSC-HVDC grid that connects three onshore wind farms on Nan’ao Island in Guangdong to the mainland, and is building some of the world’s largest HVDC grids, such as the 1.6GW 800kV network connecting Yunnan, Guangxi and Guangdong provinces.

Cai is confident that in the coming years the Chinese will be able to reduce costs in much the same way as Europe has done as the market matures, experience grows and indigenous technology is deployed.

“As an industry we should support the zero-subsidy policy, which will push the Chinese sector to become a truly mature industry and spur technology innovation,” he says.

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